In our last posting, I argued that many mentally and physically healthy older persons in developed nations retire earlier than is socially efficient. Since retirement benefits are not sensitive to the accumulated social security taxes that a person pays on his or her earnings, workers who become eligible to retire often find the improvement in retirement benefits from working longer too small to provide enough incentive to continue working.
We come back to the retirement issue this week because I discovered during a just concluded trip to Japan that this country has taken the lead in encouraging much later effective retirement than other developed nations. The system in Japan is a bit complicated, but has several important features that could be implemented in the United States and other nations. The Japanese approach also has implications for many comments on our discussion last week- I respond to these separately.
The official retirement age at medium and large Japanese companies is 60 for both men and women, and it is quite rigidly enforced, even for top executives. This retirement age is close to the lowest among rich countries, with official retirement in the United States being about five years later at age 65, and the average among 30 OECD member nations being about 64. As Posner and I discussed in the previous entry, the American Age Discrimination in Employment Act of the early 1990‚Äôs even prohibits mandatory retirement for professors and a few other occupations.
Most Japanese do not stop working at age 60. The OECD reports that Japanese men generally continue to work until almost age 70, and the average retirement age of women is only a few years younger. These retirement ages of both men and women are the highest among all OECD nations that include not only the United States, but also the nations of Western Europe.
I was initially puzzled by these OECD data for Japan since they suggested much later retirement ages than I presumed from my erroneous belief that actual retirement ages were close to the official ones. But Japanese specialists on older workers indicated to me that their numbers are similar to those of the OECD. According to these Japanese sources, about half of all men aged 65-70 are working, and so too are about one quarter of men between 70-75. Hence they too estimate an average retirement age of near age 69.
Even when they stay at the same company after age 60, which is fairly common, workers and executives are placed at lower level jobs with significantly reduced pay. Others go to smaller companies with lower pay, although perhaps in comparable positions that they had in the larger companies that had employed them for many years. In all cases they work at their new jobs for a fixed term, usually five years. Upon finishing that term at age 65,they tend to move on to other jobs, also with a fixed term, and frequently with a further reduction in their earnings.
What spurs the Japanese to work beyond the official retirement age is partly that they usually are in good health, and do not look forward to about 30 years of retirement without much to do. However, they also continue to work because retirement benefits from the government and private companies are modest, even for higher-level executives. Retirement income of about $2000 per month is at the high end, so most workers who retire at 60 receive much less than that. They decide to work in their 60's and their 70's in order to supplement greatly their incomes.
In this way the Japanese system enables men and women to keep working to relatively late ages while at the same time providing flexible earnings and activities of older workers. In effect, this system recognizes that while older workers generally remain productive in the modern era of good health, they may not continue to merit the earnings reached after many years of employment. Some economists have attributed mandatory retirement to the need to move older workers out of the labor force because they are paid more than their contribution to production. Whether or not this interpretation of mandatory retirement is correct, the Japanese system does provide flexibility in both the earnings and occupations of older workers while still mandating official retirement at the early age of 60.
The Japanese system where employees past age 60 sometimes work for lower pay at the same company that had employed them would not be possible in the United States and some other countries because of legislation that prohibits alleged discrimination against older workers. The combination of legislation that prevents companies from lowering the earnings of older employees, and of legislation that prevents mandatory retirement in some occupations, creates a major rigidity in the market for older workers.
In several crucial respects the retirement system of many European countries is the opposite to that of Japan. For example, the official retirement age of men in Belgium, German, and the United Kingdom is 65, five years higher than in Japan. Yet, actual retirement ages are considerable lower in these countries than in Japan. For example, the typical age of retirement is 59 and 61 in Belgium and Germany, respectively. Effective retirement ages are also below age 60 in Italy, France, and several other Western European countries. In these countries inflexible labor markets make it difficult for older persons to find work, and generous benefits encourage retirement at even earlier ages than the official age.
Early ages of actual retirement and generous retirement benefits contribute to the very serious problems faced by the social security systems of most West European nations, and to a lesser extent of the United States. By extending their actual retirement ages to the Japanese levels, these nations would go some ways toward solving their problem of financing old age benefits.
The Japanese intrinsically face a tougher retirement problem than most other member nations of the OECD since they have one of the lowest birth rates in the world, the oldest life expectancy, and virtually no immigration. As a result, about 40 per cent of the Japanese population is expected to be aged 65 or older by the year 2050, the largest fraction of elderly among OECD countries. The continued employment of most of their men, and to some extent their women, well beyond the official retirement age of 60 has helped to meet, although it has not solved, Japan‚Äôs challenge of a rapidly aging population. Still, however, their flexible approach to the employment of older persons provides an excellent example to be emulated by other nations faced with a rapidly growing elderly population.